Friday, March 14, 2014

Looping Back Around

The United States Securities & Exchange Commission (SEC) has let loose of some of the areas that they will be looking at during upcoming examinations. Of course, the majority of their examinations appear to be directed at dually registered brokerage firms. These are firms that are both a registered broker dealer and also a registered investment adviser. I warned about these dually registered brokerage firms in my book.

Apparently, the SEC is realizing that a customer with a brokerage account who is suddenly moved to a investment advisory account may be getting the shaft. I call this "looping back around."

Looping back around is when the financial advisor has sold you a bunch of high commission and high expense products and then realizes that you probably are not interested in buying any more products of this kind. Therefore, they "loop back around" to sell you an investment advisory account that pays them an annual ongoing management fee. These advisors have already taken you to the cleaners on the products that they sold you, but because of the extreme pressure they have to meet their annual $250,000 revenue quota, they need to squeeze more revenue out of you. As a result, they "loop back around."

I talk about this in my book, Meet Wally Street. The Reason You're Stupid. These financial advisors want to be registered investment advisers like me, but they cannot give up the lure of big commissions from inappropriate product sales. After all, if they sell a Variable Annuity or a Non-Publicly Traded REIT, then they can make close to 10% with some of these products. On a $100,000 investment, that is $10,000. If they went straight to an investment advisory account when they first met you, then they might have only made $375 per calendar quarter.

When their revenue quota is $250,000 or more per year, then what they do is sell you a bunch of crap that helps them get closer to their revenue quota. Think about it. If you can make $10,000 or make $375 off of a new client, then which one will you choose? This is why the sub-title of my book is "The Reason You're Stupid." I am not trying to be insulting, but somebody needs to wake people up. They are getting this rip off treatment every day by Wally Street. About 85% of Americans are doing business with Wally Street. Sad, but true.



The SEC is not liking the fact that they "jacked you up" for $10,000 in commissions, then later turned around and put you in an investment advisory account. Their viewpoint apparently is that you should stay in one or the other and not be moved from one to the other. In my opinion, the SEC is missing the boat on this one. Instead of focusing on this shifting sands approach used by Wally Street, they should eliminate the inherent conflicts of interest that favor banks, insurance companies and Wall Street firms in the first place.

What if everyone who received investment advice was never sold high commission and high expense products with inherent conflicts of interest in the first place? Why doesn't the SEC work with Congress to eliminate this crap? These banks, insurance companies and Wall Street firms sell this crap and then all other investment advisers like me are tainted by the actions of Wally Street.

Why should people have to fear that being sold a bunch of crap every time that they need investment advice? Sometimes the simplest answer is right in front of your nose. In this case, the SEC's nose. Get Congress to change the laws and eliminate commissions altogether. Wouldn't that be nice?

The only way that you could get your financial advice would be from people who charge a fixed fee, an hourly fee or an assets under management fee. Fully disclosed in writing and no possibility of selling you crappy products loaded down with commissions. Perhaps, one day we might see the SEC or Congress take action on this issue. However, I have my doubts since the politicians pockets are full of Wall Street money.

Until then, the best that you can do is read my book and learn about using Independent Registered Investment Advisers instead of that rip off artist Wally Street.